Nebraska Law Review

Volume 81 | Issue 3 Article 2

2003

Why Expectation Damages for Breach of ContractMust Be the Norm: A Refutation of the Fuller andPerdue "Three Interests" ThesisW. David SlawsonUniversity of Southern California Gould School of Law, gsilsby@law.usc.edu

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Recommended CitationW. David Slawson, Why Expectation Damages for Breach of Contract Must Be the Norm: A Refutation of the Fuller and Perdue "ThreeInterests" Thesis, 81 Neb. L. Rev. (2002)Available at: https://digitalcommons.unl.edu/nlr/vol81/iss3/2

W. David Slawson*

Why Expectation Damages for Breachof Contract Must Be the Norm: ARefutation of the Fuller andPerdue "Three Interests" Thesis

TABLE OF CONTENTS

I. Introduction .......................................... 840

II. The Principal Institutions in a Modern Market

Economy in Which Contracts Are Used ................ 843

A. The Institution of the Economic Market: Contracts

as Bargains ....................................... 843

B. The Institution of Credit and Finance: Contracts as

Property .......................................... 845

III. Meeting the Institutions' Needs ....................... 846

A. Providing a Remedy for Every Breach ............. 846

B. Making Contracts Enforceable as Soon as They Are

M ade ............................................. 847

C. Compensating the Injured Party for What He Has

L ost ............................................... 848

1. Damages Under the Expectation Measure ...... 848

2. Damages Under the Reliance Measure ......... 849

a. The Shortfall .............................. 849

b. Attempts to Prove this Shortfall Is

Unimportant or Does Not Exist ............ 850

3. Damages Under the Restitution Measure ....... 852

a. The Restitution Measure in Theory ......... 852

b. The Restitution Measure in Practice ........ 853

c. A Suggestion for Reducing the Unfairness

and Arbitrariness of the Restitution Measure

in Practice ................................. 854

D. Providing the Right Incentives for Decisions

W hether to Breach ................................ 855

E. The Legitimate Uses of the Restitution and Reliance

Measures in Contract Law ......................... 856

© Copyright held by the NEBRASKA LAW REVIEW.

* Torrey H. Webb Professor of Law, University of Southern California.

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IV. The "Three Interests" Thesis of Fuller and Perdue ..... 857A. Ignoring Context .................................. 858B. Using an Inappropriate Concept of Justice ......... 858C. Describing the Institutional Approach as Circular.. 859D. Asserting that Contracts Have Present Value OnlyBecause the Law Enforces Them ................... 860E. Identifying the General Enforceability of Promisesas the Legal Basis for the Credit System ........... 861F. Asserting that Expectation Damages Are GenerallyEasier to Prove than Reliance Damages ............ 861V . Conclusion ............................................ 862

Appendix: Excerpts from L.L. Fuller & William R. Perdue,Jr., The Reliance Interest in Contract Damages: 1 ...... 863

I. INTRODUCTIONContract law uses three measures of damages. The expectationmeasure puts the injured party in as good a position as if the contracthad been performed (i.e., not breached).' The reliance measure putsthe injured party in as good a position as if the contract had not beenmade.2 The restitution measure restores to the injured party any ben-efit the breaching party obtained from his breach at the injured

party's expense. 3

Although the expectation measure has always been the norm,4 LonL. Fuller and William R. Perdue, Jr. famously questioned its primarystatus in an article that appeared in 1936.5 They began by assertingthat each of the measures compensates the injured party for the lossof an associated "interest" in the contract-the expectation measurecompensates for the loss of the "expectation interest," the reliancemeasure compensates for the loss of the "reliance interest," etc. Theythen ranked these "interests" in what they considered to be the orderof their importance, putting the restitution interest first and the ex-pectation interest last:

It is obvious that the three "interests" we have distinguished do not presentequal claims to judicial intervention.... The "restitution interest," involving acombination of unjust impoverishment with unjust gain, presents the strong-est case for relief. If, following Aristotle, we regard the purpose of justice asthe maintenance of an equilibrium of goods among members of society, therestitution interest presents twice as strong a claim to judicial intervention asthe reliance interest, since ifA not only causes B to lose one unit but appropri-

1. E. ALLAN FARNSWORTH, CONTRACTS § 12.8 (3d ed. 1999).2. Id. § 12.1.3. Id.4. Id. § 12.8.5. L.L. Fuller & William R. Perdue, Jr., The Reliance Interest in Contract Damages(pts. 1 & 2), 46 YALE L.J. 52, 373 (1936-37). Relevant excerpts of Part I are re-

printed in the Appendix.

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EXPECTATION DAMAGES

ates that unit to himself, the resulting discrepancy between A and B is not one

unit but two.

On the other hand, the promisee who has actually relied on the promise,

even though he may not thereby have enriched the promisor, certainly

presents a more pressing case for relief than the promisee who merely de-

mands satisfaction for his disappointment in not getting what was promised

him. In passing from compensation for change of position to compensation for

loss of expectancy we pass, to use Aristotle's terms again, from the realm of

corrective justice to that of distributive justice. The law no longer seeks

merely to heal a disturbed status quo, but to bring into being a new situation.

It ceases to act defensively or restoratively, and assumed [sic] a more active

role. With the transition, the justification for legal relief loses its self-evident

quality. It is as a matter of fact no easy thing to explain why the normal rule

of contract recovery should be that which measures damages by the value of

the promised performance.6

After thus concluding that "it is. . . no easy thing" to explain why

the expectation measure is the norm, they went on to explore what the

reason or reasons might be. They eventually concluded that although

there were no good reasons for protecting the expectation interest,7

there was a good reason for using the expectation measure of damages

as the norm: because, they claimed, it generally results in the same

recovery as the reliance measure would and is easier to prove.8

The Fuller and Perdue article and its "three interests thesis" has

had an immense scholarly and academic influence in the United

States. Richard Craswell cited over sixty publications treating the

three interests thesis in his article on the subject published in 2000. 9

A recent Lexis search of the "Law Reviews, Combined" database re-

vealed twenty-six citations to the article within the last two years. 10

The effect of the article has been to throw the question of the proper

measure of damages into doubt. Although it has been convincingly

shown that the article's conclusion is incorrect-that the expectation

measure generally results in the same recovery as the reliance mea-

sure would"-so that the article's further conclusion that the expec-

tation measure generally makes a good surrogate for the reliance

measure is wrong, no one has yet come up with any other generally

accepted reason or reasons for the expectation measure being the

norm. The Restatement (Second) of Contracts states the three inter-

ests thesis almost verbatim as Fuller and Perdue stated it and offers

6. Id. at 56-57.7. Id. at 57-60.8. Id. 60-62.

9. Richard Craswell, Against Fuller and Perdue, 67 U. CH. L. REv. 99, 105-21

(2000).10. The search was conducted by Paul Kroeger, a student at the author's law school,

on May 31, 2001.

11. See, e.g., WILLIAM D. HAWKLAND, SALES AND BULK SALES 153-54 (1958); Melvin

Aron Eisenberg & Robert Cooter, Damages for Breach of Contract, 73 CAL. L.

REV. 1434, 1445-49 (1985).

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no reasons for preferring any one of the measures over the othertwo.12 No hornbook, treatise or casebook in print offers any such rea-sons either, and nearly all of them mention the Fuller and Perdue ar-ticle and comment upon it favorably.13

Despite its immense scholarly and academic influence, however,the article and its thesis have had no discernible effect on the law.The expectation measure continues to be the norm, 14 and even in thesituations for which the contracts restatements have explicitly sug-gested a flexible approach to damages, the courts continue to use theexpectation measure almost exclusively of the other two. 15

As demonstrated below, the courts have rightfully used the expec-tation measure to the near exclusion of the other two measures. To-ward that end, Part II of this Article sets forth the principalinstitutions in a modern market economy in which contracts are used.Part III refutes the Fuller and Perdue three interests thesis by ex-plaining how the expectation measure meets the needs of these princi-pal institutions in four crucial respects, while showing that neither ofthe other measures meets these needs in even one such respect. PartIV exposes further endemic weaknesses in the three interests thesis.Part V concludes by showing that the three interests thesis is tooflawed to be of use for comparing the merits of the three damagesmeasures.

12. RESTATEMENT (SECOND) OF CONTRACTS § 344 (1981) (Purposes of Remedies)states:

Judicial remedies under the rules stated in this Restatement serve toprotect one or more of the following interests of the promisee:(a) his "expectation interest," which is his interest in having the benefitof his bargain by being put in as good a position as he would have been inhad the contract been performed,(b) his "reliance interest," which is his interest in being reimbursed forloss caused by reliance on the contract by being put in as good a positionas he would have been in had the contract not been made, or(c) his "restitution interest," which is his interest in having restored tohim any benefit that he has conferred on the other party.

13. See, e.g., JOHN D. CALAMARI & JOSEPH M. PERILLO, THE LAW OF CONTRACTS § 14.4(4th ed. 1998) (hornbook); CHARLES L. KNAPP ET AL., PROBLEMS IN CONTRACT LAW960-61 (4th ed. 1999) (casebook).

14. See FARNSWORTH, supra note 1, § 12.8.15. See, e.g., W. David Slawson, The Role of Reliance in Contract Damages, 76 COR-NELL L. REV. 197 (1990) (concluding that despite the urging in both the Restate-ment (First) of Contracts section 90 and Restatement (Second) of Contracts section90 to take a more flexible approach, the courts, without exception, have used theexpectation measure whenever they could for breaches of contracts made enforce-

able by detrimental reliance rather than by consideration).

EXPECTATION DAMAGES

II. THE PRINCIPAL INSTITUTIONS IN A MODERN MARKET

ECONOMY IN WHICH CONTRACTS ARE USED

Almost every purchase and sale in a modern market economy in-

volves a contract, even if the contract sometimes only consists of im-

plied warranties. (By a "market economy" I mean an economy in

which the dominant means of doing business is for sellers to compete

with one another in largely unregulated markets.) I will deem a

purchase and sale to have occurred in an economic market if the pur-

chaser had a choice of whom to purchase from, because the availabil-

ity of such a choice is the essential condition for the existence of

competition. A purchaser nearly always has such a choice in a modern

market economy. The economic market is one of the two principal in-

stitutions in which contracts are used.

The other is the institution of credit and finance. Contracts in this

context are the things which are bought and sold as well as the usual

means of buying and selling them. Stocks and bonds are contracts, for

example. Although there are numerous kinds of contracts that are not

typically used in either of these institutions, these two are so impor-

tant to the functioning of a modern market economy that if contracts

did not meet their needs, the economy could not function.

A. The Institution of the Economic Market: Contracts as

Bargains

Every developed country in the world has a market economy. The

few socialist economies still left are in or near collapse. Economic

markets operate through bargains and could not operate without

them. There is a bargain every time anything is bought and sold.

Contracts are promises the law will enforce, 16 and promises made en-

forceable by consideration are bargains. The consideration and the

promise or promises it supports are the two sides of the bargain. Al-

though not all bargains are contracts, because not all of them include

promises, bargains must be contracts if any part of one party's per-

formance is to come after any part of the other's. Bargains in which at

least one party is to render services must therefore be contracts, for

example, because the performance of services inevitably takes time.

Either the payment for the services must come before the services are

performed, or the services must be performed before they are paid for.

Once the industrial revolution began, even most bargains for the sale

of goods had to be contracts, because goods then began to be produced

far from where they would be used, and buyers and sellers therefore

had to deal with each other over long distances. Either the buyer had

to pay for the goods before he received them, or the seller had to de-

16. RESTATEMENT (SECOND) OF CONTRACTS § 1 (1981) (Contract Defined).

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liver the goods before he was paid for them.17 Therefore, since theindustrial revolution, one can say the same of contracts as one couldpreviously have said only about bargains: economic markets operatethrough contracts and could not operate without them.

Markets are important because, as Adam Smith so famously put it,they are the "invisible hand" by which individual gain is made to servethe public good.18 Contracts are both the means by which marketsharness the individual gain and the means by which the individualgain is made to serve the public good. Both parties must expect togain from a contract or they would not make it. In the large majorityof instances, both parties do gain, even if not quite as much as theyhad hoped. For example, a lawyer contracts with a painter to paintthe lawyer's house. The house will be better painted than if the law-yer painted it herself, and the lawyer will work many fewer hours ather job as a lawyer to earn the money to pay the painter than it wouldtake her to paint the house herself. The painter will work many fewerhours painting the house than he would need to work to do or makethe things for which he spends the money he will earn from paintingthe house. Both parties will gain even more from the contract thepainter makes with the seller of the paint, because the paint will bethe product of centuries of technological and organizational progress,which would be impossible for either the painter or the lawyer to havedone themselves.

Markets make the individual gain serve the public good by en-gendering economic competition. The sellers whose goods the buyerslike the most make the most profits and therefore prosper and expand,while the sellers who fail to offer goods that buyers like eventuallydisappear. Sellers are thereby encouraged to improve their goods andto lower the costs of producing them, both of which increase the publicgood. Contracts play essential roles in this process both in the obvioussense that markets could not function without them, because everypurchase and sale is a contract, and in the not-so-obvious sense thatthey are the links in the chains by which large numbers of individualsbind themselves together in the cooperative efforts that improve goodsand lower the costs of producing them. The links in the chains bywhich individuals are organized into firms, the links in the chains bywhich firms distribute and sell what they produce, and the links in thechains that bind firms to their suppliers and all the other firms withwhich they interact, are all contracts. Adam Smith also pointed thisout.19

17. W. DAVID SLAWSON, BINDING PROMISES: THE LATE 2

0TH CENTURY REFORMATIONOF CONTRACT LAW 9-11 (1996).

18. ADAM SMITH, THE WEALTH OF NATIONS 423 (Edwin Cannon ed., Random House1937) (1776).

19. Id. at 11-12, 22-29; see also JOHN RAWLS, A THEORY OF JUSTICE 342-47 (1971).

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EXPECTATION DAMAGES

Although many contracts presumably would be made and kept

even if the law did not enforce them, the law's enforcing them encour-

ages the making of more of them and increases the value of those that

are made by providing an important additional assurance that they

will be kept. For example, if the law did not enforce contracts, the

lawyer and the painter would have had to make and accept frequent

partial payments, preceded or followed by the lawyer inspecting the

just completed part of the painter's work, because neither could risk

investing much of his or her money or time without first knowing that

the other had done his or her part. And even then, the lawyer would

have no protection against defects that would not show up until

months or years later, such as the painter's use of inferior paint, and

the painter would have no protection against the lawyer's refusal to

make the payment that was to follow his completion of the work.

Thus, even if both did perform as promised, the costs of their perform-

ances would have been increased.For all these reasons, it is extremely important that contracts be at

least generally enforced. Economic markets would eventually collapse

if they were not, and even in the short run they would operate much

less efficiently, and technological and industrial progress would be

greatly slowed.

B. The Institution of Credit and Finance: Contracts as

Property

Almost all the instruments of credit and finance are contracts.

Stocks, bonds, loans of all kinds, accounts of all kinds (bank accounts,

charge accounts, credit card accounts, money market accounts, etc.),

shares in joint ventures, partnerships, and "funds" (mutual funds,

pension funds, hedge funds, etc.) are all contracts. The English equity

courts had made contract rights generally assignable by the end of the

seventeenth century, the English law courts had followed suit by the

end of the eighteenth century, and the courts in both cases did so ex-

plicitly because the then emerging credit and finance systems re-

quired it. These systems required it because they required that

stocks, bonds, loans, etc. be capable of being bought and sold.20

If something can be bought and sold, it is property. The instru-

ments of credit and finance are therefore property. As such, any con-

tract right that can be assigned is property, whether it is an

instrument of credit and finance or not, and, as a rule, the law allows

any contract right to be assigned. 2 1 The United States Supreme Court

recognized in 1972 that even unassignable contract rights are prop-

erty for the purpose of protecting them against deprivation without

20. FARNSWORTH, supra note 1, §§ 11.1-11.2.21. Id.

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due process of law.22 Without contracts, the institutions of credit andfinance could not exist.

Ill. MEETING THE INSTITUTIONS' NEEDSThe expectation measure meets the needs of these institutions in

four crucial respects: 1) it provides a remedy for every breach; 2) itmakes contracts enforceable as soon as they are made; 3) it compen-sates the injured party for what he has lost, as the institution con-cerned values that loss; and 4) it provides the right incentives fordecisions whether to breach. Neither of the other measures meetsthese institutions' needs in even one such respect. Each of these re-spects is discussed in turn.

A. Providing a Remedy for Every BreachThere is no situation in which the expectation measure cannot be

used, whereas the law only allows either of the other measures to beused if there was a so-called "material" or "total" breach23-a breachserious enough to entitle the injured party to withhold her perform-ance and cancel the contract.24 This limitation is not arbitrary. Aparty cannot incur a reliance loss unless the other party's materialbreach entitles him to cancel the contract, and he cancels it. This is sobecause as long as the contract is still in force, the breaching partystill owes the non-breaching party her performance, the receipt ofwhich was what he relied upon. Likewise, for a restitutional entitle-ment, as long as the contract is still in force, the breaching party stillowes the non-breaching party her performance, which was the agreedexchange for any benefits she may have received from him as a resultof her breach.

Moreover, even if the law allowed him to, a plaintiff could not useeither of the other measures to recover in the event of a partial breachbecause the notion of a reliance or a restitution recovery for a partialbreach is incoherent. To illustrate, assume that Contractor entersinto a typical contract with Owner to build a house for $100,000. As-sume further that Contractor performs perfectly, but Owner pays heronly $95,000. In this instance, what is Contractor's reliance loss orrestitutional entitlement? There is no sensible answer to either ques-

22. Bd. of Regents v. Roth, 408 U.S. 564, 576-77 (1972); Perry v. Sinderman, 408 U.S.593, 601 (1972). Of course the Court has recognized that stocks, bonds and otherinstruments of credit and finance are property since long before 1972. The casescited extended this recognition to contract rights generally. The cases involvedemployees' rights under contracts of employment, which are generally notassignable.

23. FARNSWORTH, supra note 1, §§ 12.16 (reliance measure), 12.20 (restitutionmeasure).

24. Id. § 8.15.

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tion, because the only loss she suffered was $5,000 of her expectancy.The opposite situation also makes the point. Suppose that Ownerpaid the $100,000 but Contractor left a defect that would cost Owner$5,000 to correct. There is no sensible answer to what Owner's reli-ance loss or restitutional entitlement is in this case either, althoughhis expectation loss of $5,000 is clear.

Sales of tangible property also serve to illustrate the point. Sup-pose a sale of a shipload of crude oil warranted to have sulfur contentof no more than 0.50 percent tests at 0.54 percent. Suppose furtherthat the excess sulfur will cost the buyer $10,000 in additional refin-ing costs to remove. Again, although the expectation loss is obviously$10,000, there is no logical answer to the question of what is the reli-ance loss or the restitutional entitlement. The inability of either thereliance or the restitution measure to provide a recovery in cases ofonly partial breach is extremely important, because neither of theprincipal institutions in which contracts are used could function ifpartial breaches were not reimbursed. Creditors could not recoverdamages for late payments or for small payments that were nevermade. Persons who had contracted for services to be performed couldnot recover for small defects or only moderately incomplete perform-ances. Buyers could not recover for defects in goods they hadaccepted.

There is no reference to the restriction of the reliance and restitu-tion measures to cases of total breach anywhere in the Fuller and Per-due article. The authors were evidently unaware of it.

B. Making Contracts Enforceable as Soon as They Are Made

Although any contract is enforceable in principle as soon as it ismade, it is only enforceable as a practical matter if a breach wouldgive the injured party the right to recover enough damages to make itworthwhile to sue. The expectation measure gives such a right imme-diately, because it entitles each party to recover the profits she couldreasonably have expected to make if the contract were performed, andif each party did not expect that she would make a profit if the otherperformed, the contract would not have been made. 25

The reliance measure, however, does not make a contract enforcea-ble by either party until she has relied on it to her substantial detri-ment. Thus, either party could breach the contract without incurringany liability at all until the other had relied on it to some extent, andeither could breach without incurring enough liability to make theother's litigating worthwhile until the other had relied to a substantialextent. Businesses could hardly function if damages were limited inthis way, because "deals" would never "close." For example, two busi-

25. See supra section II.A.

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nesses could negotiate for months over a joint venture before they fi-nally reached agreement, but either one could still change its mindand call the whole thing off or insist on renegotiating some point towhich it had already agreed, with impunity, if it did so before theother had substantially relied. Transaction costs would be greatly in-creased, because contracts would have to be renegotiated indefinitelyuntil one party finally "took the plunge" and substantially relied. Pro-ductive efficiency would be reduced, because the pace of businesswould be slowed. Neither party could rely on obtaining the profit heexpected from a contract until the other had fully performed, becauseall that either could recover if the other party breached would be thecosts he had already incurred.

If the law were to limit injured parties to a restitution recovery, theresults would be even worse. Neither party would then be entitled toa large enough recovery to make litigating worthwhile until the otherhad benefited substantially at her expense. That would nearly alwaystake a long time to happen, and in the large majority of cases it wouldnever happen, unless the benefit was merely the receipt of a deposit ora partial payment of the purchase price. Further, if the deposit orpartial payment was the benefit, getting it back would still leave theinjured party without her expected profits and the breaching partywithout any penalty for having breached. Restitution recoveries pro-vide no deterrence against breaching even in the relatively rare situa-tions in which they do provide sufficient compensation to the injuredparty.

C. Compensating the Injured Party for What He Has Lost1. Damages Under the Expectation Measure

The expectation measure gives the injured party the value of hisbargain in every case. This is the value that the economic marketplaces on contracts, because it is in order to obtain this value that thecontracts which are used in economic markets are made. 26

The expectation measure also gives the injured party the value ofhis property in the contract, which is necessary if the institutions ofcredit and finance are to function as they should. Although particularitems of property may have sentimental, personal, aesthetic or othernoneconomic values, if an item has an economic value, that value isthe profit or other use an owner of it could expect to get from it, dis-counted by the risk that the expectation will not be realized. For ex-ample, the economic value of an apartment house is estimated byreference to the profit (rents in excess of maintenance and operationcosts) an owner could expect to make from it, discounted by the riskthat the profit will not be realized. Likewise, the economic value of an

26. See supra section II.A.

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automobile is the use one could expect to get from it, discounted by therisk that something will go wrong with it before its expected use isrealized. The instruments of credit or finance are valued the sameway because their values are their economic values. For example,stocks are valued according to the profits the corporations are ex-pected to make in the future, discounted by the risk that they will notmake them. If the stocks are not publicly traded, investors makethese estimates for themselves. If the stocks are publicly traded, thebuying and selling of them on the public markets based on these esti-mates by investors, brokers, fund managers, speculators and othersdetermines the market prices at which they are bought and sold. Theexpectation measure is the value of a contract right in a market econ-omy, at least if the right is assignable, as it generally is.

2. Damages Under the Reliance Measure

a. The Shortfall

Recoveries under the reliance measure fall short of both institu-tions' needs, because there are no such recoveries at all for partialbreaches, and even for total breaches the recoveries do not include theexpected profits or the costs incurred before the contract was made. 2 7

The last limitation is not only the law, it is inherent in the logic of themeasure, because the injured party cannot have incurred costs in reli-ance on the contract unless he incurred them after the contract wasmade. Fuller and Perdue were also evidently unaware of this limita-tion on the use of the reliance measure, 28 just as they were of the limi-tation of its use to cases of total breach.

This limitation makes the reliance measure especially inadequate,because most of the costs of producing or marketing products in amodern economy are incurred before the products are sold. For exam-ple, a manufacturer will likely have incurred practically all the costsof manufacturing the product before it sells it to a wholesaler or re-tailer and will likely incur little if any additional costs thereafter. Thesame will be the case for the wholesaler or retailer. The only costsmost retailers incur after making a sale are the costs of a plastic orpaper bag. Likewise for agricultural products, for which all the costsof owning the land and of planting, tending and harvesting the cropwill generally have been incurred before the crop is sold. Even forservices contracts, in which the services are to be rendered after thecontract is made, the seller will at least have incurred its overheadcosts before the contract was made.

For the kinds of total breaches that can occur in the systems ofcredit and finance, the reliance measure does even worse. If borrow-

27. FARNSWORTH, supra note 1, § 12.16.28. See Fuller & Perdue, supra note 5, at 74.

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ers breached, lenders could recover only what they had lent, plus legalinterest, no matter what the agreed interest rate had been. If corpora-tions breached, shareholders could recover only what the purchasersof the shares had paid when the corporation first issued its shares,plus legal interest, because as assignees of the original shareholders'rights, all subsequent shareholders would have no more rights thanthe original shareholders would have had.29 Options to buy long orsell short would be worth no more than the paper they were printedon.

b. Attempts to Prove this Shortfall Is Unimportant or DoesNot Exist

Fuller and Perdue claimed that the reliance measure provides aslarge a recovery as the expectation measure does when lost opportuni-ties are taken into account. Their reasoning was that the injuredparty could have made the same profit on a contract with someoneelse if he had not made it with the party who breached.3o They offeredthe following example:

Physicians with an extensive practice often charge their patients the full officecall fee for broken appointments. Such a charge looks on the face of thingslike a claim to the promised fee; it seems to be based on the "expectation inter-est." Yet the physician making the charge will quite justifiably regard it ascompensation for the loss of the opportunity to gain a similar fee from a differ-ent patient. This foregoing of other opportunities is involved to some extent inentering most contracts, and the impossibility of subjecting this type of reli-ance to any kind of measurement may justify a categorical rule granting thevalue of the expectancy as the most effective way of compensating for suchlosses.

3 1

Although the example seems to support the claim, it does not.First, the breaches were total breaches-the patients did not show upfor their appointments-so the example does not include cases of onlypartial breach, in which the reliance measure provides no recovery atall. Second, although the example correctly describes the conse-quences of a total breach by a buyer-patients are buyers of a physi-cian's services-when the seller has only a limited supply of the thingto sell, it does not include the consequences of a total breach by abuyer when the seller has an unlimited supply of the thing to sell.The latter kind of seller is much more common than the former in amodern economy. (Physicians' supplies are limited because what theysell is their time, at least as Fuller and Perdue pictured it.)

Dean William D. Hawkland was apparently the first to explain thesignificance of this distinction, in a book published in 1958.32 When a

29. CALAMARI & PERILLO, supra note 13, §§ 18.3, 18.17.30. Fuller & Perdue, supra note 5, at 60.31. Id.32. HAWKLAND, supra note 11, at 153-54.

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buyer breaches a contract with a seller who has an unlimited supply ofsomething, the seller loses the profits he would have made on thatsale, and he does not recover them on other sales he makes thereafter,because he would have made the other sales anyway, not having onlya limited supply of the thing. Therefore, he did not lose any opportu-nities to sell to others when the first buyer breached. For example, anautomobile manufacturer can typically supply its dealers with asmany cars as they can sell. Therefore, if a buyer orders a car from adealer but refuses to accept it when the dealer tenders delivery of it,the dealer loses the profits it would have made on the sale of that car.This is so even if the dealer sells the same car for the same price to asecond buyer, because if the first buyer had accepted the car, thedealer could have ordered another car from the manufacturer and soldit to the second buyer. The same is generally the case today even forsellers of services. For example, an air conditioning service can typi-cally sell its services to as many customers as request them. It sched-ules its calls for a few days ahead, and if an unusually large number ofrequests come in, it merely schedules some of them for further aheadthan it usually would or puts its employees on overtime.

Melvin Aron Eisenberg and Robert Cooter tried to salvage some-thing from Fuller and Perdue's claim by saying it would be correct in aperfectly competitive market, because the sellers in such marketshave only limited supplies by definition. Eisenberg and Cooter alsopointed out, however, that the risk that the buyer with whom theseller would otherwise have contracted would also have breached wasvanishingly small. They were willing to make this assumption them-selves, apparently because they thought it would generally be thefact.3 3 However, it almost certainly would not be the fact if con-tracting parties were limited to recovering their reliance damages bylaw. Under such a limitation, every buyer or seller with whom a selleror buyer might otherwise have contracted would have had the same,potentially enormous, economic incentive to breach as did the actualbuyer or seller. Suppose for example that a farmer contracted to sellhis bean crop to a food processor shortly before he planted it and thatby the time he harvested it, a drought in another part of the countryhad sent the market price of beans up to twice the contract price. Ifthis farmer repudiated and sold his beans on the market instead,would it be reasonable to assume that some other farmer with whomthe food processor might have contracted would not have done thesame? More likely, every farmer in the area with a similar contractwould also have repudiated. More likely still, under a law that limitedrecoveries to the reliance measure, neither farmers nor food proces-sors would ever have made such contracts in the first place, because

33. Eisenberg & Cooter, supra note 11, at 1445-49.

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both would have known that they could not enforce them if it turnedout to be to the other party's advantage to breach.

3. Damages Under the Restitution Measure

Recoveries under the restitution measure also fall short of the in-stitutions' needs by not providing anything at all for partial breaches.However, the question of their adequacies for meeting the institutions'needs for total breaches is complicated by the existence of some in-coherencies in the concept of the restitution measure itself. The mea-sure in theory and the measure in practice are very different things.

a. The Restitution Measure in Theory

Fuller and Perdue, and the standard authorities, all define the res-titution recovery as a recovery of a benefit the defendant obtained atthe plaintiffs expense as a result of the breach. 3 4 They all, therefore,at some point also refer to it as avoiding "unjust enrichment."35 Thisdefinition, however, is inconsistent with their implicit assumptionthat the restitution measure provides something that the expectationmeasure does not. For, if the benefit the defendant obtained was atthe plaintiffs expense, the expectation measure already includes it,because it would then have been the plaintiffs benefit if the defendanthad not breached.

Take, for example, a contract for the sale of goods in a perfectlycompetitive market such as a securities or commodities market. If themarket price at the time for delivery is higher than the contract price,and the seller breaches by selling the goods at the higher market priceto someone else instead, the restitution measure is the difference be-tween the contract and the market price. But this would also be theexpectation measure, because the buyer could have gotten this profithimself if the seller had performed. Likewise, if the market price atthe time for delivery is lower than the contract price, and the buyerbreaches by buying the goods from someone else at the lower marketprice, the restitution measure would here again be the difference be-tween the contract and the market price. But again, this would alsobe the expectation measure, because the seller could have gotten thisprofit herself if the buyer had performed. Another example is thebuyer's right to the return of his deposit if the seller has materiallybreached, which courts often call "restitutional,"36 although it couldjust as logically be characterized as reliance (because the buyer made

34. Fuller & Perdue, supra note 5, 53-54; RESTATEMENT (SECOND) OF CONTRACTS§ 344(c) (1981) (Purposes of Remedies); CALAMARI & PERILLO, supra note 13,§ 15.2; FARNSWORTH, supra note 1, § 12.1.

35. See sources cited supra note 34.36. See, e.g., Neri v. Retail Marine Corp., 285 N.E.2d 311, 313-14 (N.Y. 1972).

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it in reliance on the contract) or expectation (because it was a part ofthe buyer's cost of performance of the contract, her performance beingpaying the price).

The facts of Patterson v. Meyerhofer3 7 provide another illustration.The defendant contracted to buy four parcels of land from the plaintifffor a total price of $23,000 on the understanding that the plaintiffwould bid for them at a foreclosure auction. The plaintiffs profit (orloss) would thus be the difference between what he could get them forat auction and the $23,000 which the contract obligated the defendantto pay him for them. However, the defendant attended the auctionherself and outbid the plaintiff, paying a total of $22,380 for the par-cels. The court awarded the plaintiff $620 in expectation damages,because this would have been his profit if the defendant had notbreached. That the $620 award also fits the description of restitu-tional damages is obvious.

Thus, the restitution measure, by its own definition, never pro-vides a recovery that the expectation measure would not, and the re-covery it provides is often less. The interest it is supposed to protect istherefore illusory; it does not exist apart from the expectation interestand is always included in it.

b. The Restitution Measure in Practice

In practice, however, there is one situation in which the restitutionmeasure provides a larger recovery than the expectation (or reliance)measure would. This is the case in which a material breach by oneparty entitles the other to cease performing a contract on which he islosing money-the "losing contract" case. United States ex. rel.Coastal Steel Erectors, Inc. v. Algernon Blair, Inc.38 provides a wellknown example of this factual scenario. The defendant, a general con-tractor, had contracted with the plaintiff, one of its subcontractors, "toperform certain steel erection and supply certain equipment in con-junction with ... [the work]."39 The parties disputed who was to paythe rent on the cranes the plaintiff was using. The plaintiff quit whenthe defendant refused to pay the rent, after the plaintiff had com-pleted twenty-eight percent of the work. Although the district courtfound that the contract required the defendant to pay the rent, so thatthe defendant was the party in breach, it declined to award any dam-ages, because it also found that the plaintiff would have lost morethan the defendant owed it in damages if the plaintiff had completedthe work. The court of appeals, in an opinion written by LearnedHand, reversed. It held that the plaintiff was entitled to recover the

37. 97 N.E. 472 (N.Y. 1912).38. 479 F.2d 638 (4th Cir. 1973).39. Id. at 640.

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value of its work, which was to be measured by how much the defen-dant would have had to pay another subcontractor to do it at the sametime and place, without regard to the contract price. 40 The measure ofrecovery the court of appeals prescribed would provide more than theexpectation measure would have, because the expectation measurewas what the district court had used.

However, whatever one may think of its justice, this was not a res-titution recovery, because the defendant had not benefited at theplaintiffs expense. Rather, the plaintiff had benefited at the defen-dant's expense. The plaintiff benefited by being excused from continu-ing to work on a job upon which it was losing money. The benefit wasat the defendant's expense, because the defendant lost the right tohave the plaintiff complete the work for less than the work was worth.Moreover, the amount of the recovery was arbitrary. By its logic, adefendant has to pay more the later he breaches, unless he does notbreach until after the plaintiff has fully performed, in which case anexception applies, and the plaintiff is relegated to his expectationdamages.41 And the amount the defendant has to pay bears no rela-tion to how much, if anything, he may have benefited from the breachor how much, if anything, his breach may have cost the plaintiff.

The rationale of decisions like Algernon Blair seems to be the fol-lowing: The law only entitles a plaintiff to use the restitution measureif the plaintiff canceled the contract after the defendant committed amaterial breach. Canceling the contract leaves the defendant unjustlyenriched at the plaintiffs expense. The law of restitution-not the res-titution measure of damages for breach-therefore entitles the plain-tiff to recover from the defendant the value of this enrichment, themeasure of which is what the defendant would have had to pay some-one else to provide the same services at the same time and place.4 2

Although this rationale is logical, it arbitrarily enriches the plaintiffand punishes the defendant as just described, and it would do both ofthese things with or without the exception for the plaintiff havingcompleted his performance by the time the defendant breached.

c. A Suggestion for Reducing the Unfairness andArbitrariness of the Restitution Measure in Practice

The plaintiffs in cases like Algernon Blair should recover for thework they have done, at the contract rate, plus any incidental dam-ages the breach may have caused them, and nothing more. Thiswould leave them better off than if their contracts had not beenbreached, because they would not have to lose even more by complet-

40. Id. at 640-41.41. CALAMARI & PERILLO, supra note 13, § 15.6.42. RESTATEMENT OF RESTITUTION § 152 (1936) (Value of Services Acquired by Con-

sciously Tortious Conduct).

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ing them, and it would punish the defendants for having breached bydepriving them of the benefit of the plaintiffs completing their per-formances for less than the performances were worth. However, theseamounts of enrichment and punishment would be neither excessivenor arbitrary, and they would be enough to prevent the breachingparty from benefiting at the injured party's expense.

D. Providing the Right Incentives for Decisions Whether toBreach

A breach of contract is "Pareto efficient" if it benefits someone anddoes not leave anyone worse off.4 3 Public policy favors such a breach,because society as a whole benefits if some persons benefit and no oneis harmed. Only the expectation measure provides the right incen-tives for making breaches Pareto efficient, because only this measureleaves the party who did not breach neither worse nor better off thanif the contract had been performed. A measure that provided moredamages than the expectation measure would discourage somebreaches that would be efficient. A measure that provided less dam-ages than the expectation measure would encourage some breachesthat would not be efficient. Therefore, both the reliance and the resti-tution measures would not provide the right incentives for decidingwhether to breach, because they both generally provide less damagesthan the expectation measure would-if they provide any damages atall.

Although providing the right incentives for deciding whether tobreach is important, it is the least important of all the institutionalreasons for favoring the expectation measure, which is why I have putit last. These incentives are irrelevant for most breaches, becausemost breaches result from human weakness or miscalculation-care-lessness, mistake, laziness, scheduling too many jobs to do at the sametime, etc.-rather than from a conscious decision to breach. Moreover,usually nobody benefits from them, so that they could not have beenmade efficiently even if the breaching party had made them intention-ally. And even in most cases of intentional breach, the motivation isnot to use resources more profitably or more beneficially for someoneelse, but to reduce one's costs by "cutting a corner" or cheating in someother way, in the hope that the other party won't notice or won't doanything about it if she does.

43. Robert L. Birmingham, Breach of Contract, Damages Measures, and EconomicEfficiency, 24 RUTGERS L. REV. 273 (1970); RIcHARD A. POSNER, ECONOMIc ANALY.

SIS OF LAw 13-14 (5th ed. 1998).

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E. The Legitimate Uses of the Restitution and RelianceMeasures in Contract Law

The law of restitution comes into play in contractual situationswhenever one party would otherwise be unjustly enriched at theother's expense.4 4 These uses of the law of restitution, however, are tobe distinguished from the uses of restitution damages for breach, noneof which is legitimate, at least in my opinion.45

On the other hand, the reliance measure still has some legitimateuses. Before describing them, however, I will distinguish a situationin which although the reliance measure is frequently used, it is notnecessary, because the expectation measure already includes it. In-jured parties who cannot prove their lost profits often use the reliancemeasure to recover their costs. 4 6 There is no necessity of using thismeasure in this situation, however, if-but only if-the costs werecosts of performance, because an injured party can recover his costs ofperformance under the expectation measure, whether or not he canprove his lost profits.47 Moreover, the expectation measure provides asuperior ground of recovery in this situation, because it entitles theinjured party to recover his costs whether or not he incurred themafter the contract was made; whereas the reliance measure is limitedto costs incurred after the contract was made. 48

This brings us to a situation for which the reliance measure is stillnecessary to do justice. If the costs were not costs of performing thecontract, so that the expectation measure would not include them, thereliance measure still entitles the plaintiff to recover these costs if heincurred them after the contract was made. It is just that the injuredparty recovers these costs, because if he had not expected the contractto be profitable enough to cover them, he would not have made it. So,he presumably would have made enough profits to cover these non-performance costs if the other party had not breached. (In my opinion,the expectation measure ought to be construed to include them by thesame logic, but I have never seen this done.) For example, if the plain-tiff quit her job in reliance on a contract for a new job with the defen-dant, which was employment-at-will or for an indeterminate duration,and the defendant totally breached, the courts have generally allowedthe plaintiff to recover the compensation she lost by quitting and her

44. See, e.g., FARNSWORTH, supra note 1, §§ 8.14 (applying when a party's rightfultermination of the contract because of the other party's total breach leaves thefirst party unjustly enriched at the second party's expense), 9.6 (applying whenan unanticipated event makes a contract voidable).

45. See supra subsection III.C.3.46. See, e.g., Security Stove & Mfg. Co. v. Am. Ry. Express Co., 51 S.W.2d 572 (Mo.

Ct. App. 1932); FARNSWORTH, supra note 1, § 12.16.47. Beefy Trial, Inc. v. Beefy King Int'l, Inc., 267 So. 2d 853, 858-60 (Fla. Dist. Ct.

App. 1972) (Owen, J., dissenting); CALAMARI & PERILLO, supra note 13, § 14.9.48. See supra subsection III.C.2.

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costs of searching for a new job under the reliance measure. 49 Thecurrent definitions of the expectation measure would not include theselosses and costs, because they are neither expected profits nor costs ofperformance.

The reliance measure is also useful in connection with the secondkind of defense of unilateral mistake, which applies when the mistakewas not so obvious that the other party should have noticed it.50 Theparty who made the mistake is entitled to rescind the contract if cer-tain conditions are satisfied, one of which is that the other party hasnot relied on the mistake to his detriment.5 1 Although there are noreported decisions on the issue, Melvin Aron Eisenberg has suggestedthat the party who made the mistake should be entitled to rescindeven if the other party has relied to his detriment, provided the firstparty pays the other's reliance damages.5 2 Eisenberg's suggestion isso sensible that it will surely become part of the law at some point. 53

However, such reliance damages would not be for breach of contract,they would be for compensating the other party for her detrimentalreliance on the mistake. As such, if one had to categorize them, theywould be considered damages for the commission of a tort.54

IV. THE THREE INTERESTS THESIS OF FULLERAND PERDUE

The Fuller and Perdue three interests thesis includes the followingerrors in addition to those already identified.55

49. See, e.g., Dialist Co. v. Pulford, 42 Md. App. 173, 399 A.2d 1374 (Md. Ct. Spec.App. 1979); FARNSWORTH, supra note 1, § 12.16.

50. The other party is not permitted to make the contract by "snapping it up," if it isthat obvious. This is the first kind of unilateral mistake. CALAMARI & PERILLO,

supra note 13, § 9.27.51. Id.52. LON L. FULLER & MELVIN ARON EISENBERG, BASIC CONTRACT LAW 699 (6th ed.

1996).53. Indeed, CALAMARI & PERILLO, supra note 13, § 9.27 already states the law as

though it included Eisenberg's suggestion.54. RESTATEMENT (SECOND) OF TORTS § 1 cmt. 1 (1965) (General Principles).55. The errors already identified are: The restitution interest as Fuller and Perdue

defined it does not exist apart from the expectation interest, which already in-cludes it, supra subsection III.C.3, and the reliance measure is not the equivalentof the expectation measure if lost opportunities are taken into account, as Fullerand Perdue maintained it was, for at least four reasons. First, it provides norecovery at all for partial breaches, id. Second, even for total breaches, it does notinclude the costs the plaintiff incurred before the contract was made, supra sub-section III.C.2. Third, most breaches by far in a modern economy do not result inlost opportunities, so that even if including lost opportunities would make a reli-ance recovery equal an expectation recovery in some cases, such cases are rare,id. Fourth, the reliance measure would not include lost opportunities in practiceif it were the norm, because anyone else with whom the injured party might have

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A. Ignoring Context

Although there may be some very fundamental principles ofjusticethat are true in every time or place for all mankind, surely the mea-sure of damages for breach of contract is not one of them. Rather, theanswer to the question of what such measure is the most just mustdepend on the answers to other questions about the context in whichthe measures are to play their roles. Examples of such questions in-clude the following: How does the society concerned conceive of con-tracts? What purposes do contracts in that society serve? Inparticular, what purposes do damages for breach of contract in thatsociety serve? Yet, Fuller and Perdue began their article not by ask-ing, but by answering the question of what purposes contract damagesserve, asserting that they serve to protect the three "interests" of resti-tution, reliance and expectation.56 They then ranked these interestsin the order of importance in which I have just stated them because,they claimed, "ordinary standards of justice" made this ranking "obvi-ous."5 7 Although they later referred to a possible institutional justifi-cation for the expectation measure, it was only to immediately dismissit as irrelevant on grounds of circularity.58

B. Using an Inappropriate Concept of Justice

Although Fuller and Perdue grounded their ranking of the threeinterests on what they claimed were "obvious ... ordinary standardsof justice," they still sought to justify the ranking by demonstratingthat it was in accordance with Aristotle's concept of justice, whichwas, in their paraphrase, "the maintenance of an equilibrium of goodsamong members of society."59 They then had to characterize the mak-ing and performing of contracts as departures from this equilibrium inorder to demonstrate this accordance.60

However, whatever validity Aristotle's concept of justice may havehad for the civilization of ancient Greece, in which men, women andslaves each had their place, it is inappropriate for the modern age andfor a modern market economy in particular. The ideal now is not equi-librium, but progress. People now are admired for obtaining moregoods for themselves, not condemned for it, provided they use only thelegitimate means that markets make available to them, including the

made the same contract presumably would have breached for the same reasonthat the breaching party did, id.

56. Fuller & Perdue, supra note 5, at 53.57. Id. at 56.58. Id. at 59-60.59. Id. at 56.60. Id. at 56-57.

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making and performing of contracts. This is so because, as AdamSmith put it, markets make individual gain serve the public good.6 1

C. Describing the Institutional Approach as Circular

In their article, Fuller and Perdue acknowledged that "[iin a soci-ety in which credit has become a significant and pervasive institution,it is inevitable that the expectancy created by an enforceable promiseshould be regarded as a kind of property, and breach of the promise asan injury to that property."6 2 However, they rejected the credit sys-tem as an institutional basis for the expectation measure on theground that accepting it would be circular. They asked, "A promisehas present value, why? Because the law enforces it. 'The expec-tancy,' regarded as a present value, is not the cause of legal interven-tion but the consequence of it."63 They then went on to "reinforce"their rejection by pointing to the fact that the law generally enforcedpromises long before there was anything corresponding to a generalcredit system.64

However, it is an error to think that justification is a matter ofcause. Even if it were a fact that contracts (i.e., enforceable promises)have present value only because the law enforces them (i.e., becausethe law awards expectation damages), that would not prevent the factthat the credit system treats contracts as property from being an insti-tutional justification for the expectation measure. For if the creditsystem requires the use of the expectation measure to function effec-tively, as Fuller and Perdue acknowledged it does, this is all that mat-ters for justification purposes. It is irrelevant whether the creditsystem or the expectation measure came first historically. Presuma-bly, if English law was not already generally enforcing promises whenEngland first developed a credit system, the newly emergent institu-tional powers would have quickly seen to it that the law was changedto generally enforce promises. Or, if English law was already gener-ally enforcing promises when England first developed a credit system,the credit system would immediately have made use of the law be-cause the credit system required the law in order to function effec-tively. The credit system would be an institutional foundation of thelaw either way.

Asking which came first, an institution or a law it requires, is alittle like asking which came first, the chicken or the egg. The histori-cal fact is most likely to be that they developed together. This wastrue with Anglo-American contract law and the institution of the mar-

61. See supra section II.A.62. Fuller & Perdue, supra note 5, at 59.63. Id. at 59-60.64. Id. at 60.

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ket economy. Although an Anglo-American law of contract already ex-isted in the eighteenth century, it was rudimentary. Contracting wastime-consuming, and legal technicalities made the outcome of contractlitigation uncertain. Moreover, contractually set prices and otherterms of sale ran the risk of being illegal for conflicting with the so-called "duties of the common callings," the prices and other terms ofwhich were set by law, at least in principle. The English and Ameri-can courts did not begin the development of the contract law we nowgenerally call "classical contract" until late in the eighteenth century,which, not merely by coincidence, is also the time at which historiansmark the beginning of market economies in England and the UnitedStates.65

D. Asserting that Contracts Have Present Value OnlyBecause the Law Enforces Them

In their article, Fuller and Perdue wrote that "[a] promise has pre-sent value, why? Because the law enforces it."66 Although it is cer-tainly true that contracts generally have greater present valuesbecause the law enforces them than they would have if the law did notenforce them, it does not follow that if the law did not enforce them,they would have no present value. All sorts of other factors-honor,reputation, reciprocity ("I will keep my promises to you if you keepyours to me."), and simple honesty, for example-also contribute. Thedebts that underdeveloped countries owe to lenders in developed coun-tries are a current example. These debts total in the trillions of dol-lars, and of course the lenders to whom they are owed would neverhave lent the money in the first place if they did not think the loanswould be valuable. Yet there are no courts with the power to compelthese countries to pay their debts, and during the international debtcrisis of the 1980s, there was apprehension that some countries wouldunilaterally renounce their contracts. 67 Of course many of these loansare now valued at less than their face values, but they still have somevalue-trillions of dollars of it. Fuller and Perdue's assertion that"[t]he expectancy, regarded as a present value, is not the cause of legalintervention but the consequence of it,"68 is false, as this exampledemonstrates.

65. SLAWSON, supra note 2, at 9-11.66. Fuller & Perdue, supra note 5, at 59.67. See, e.g., Steven M. Cohen, Give Me Equity or Give Me Debt: Avoiding a Latin

American Debt Revolution, 10 U. PA. J. INT'L ECON. L. 89, 98-99 (1988).68. Fuller & Perdue, supra note 5, at 59-60.

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E. Identifying the General Enforceability of Promises as theLegal Basis for the Credit System

It was not, as Fuller and Perdue maintained, the general enforce-ability of promises that made contract rights property,6 9 rather, as ex-plained earlier, it was the general assignability of contract rights.7 0

F. Asserting that Expectation Damages Are GenerallyEasier to Prove than Reliance Damages

Fuller and Perdue's final conclusion was that, although there wereno good reasons for protecting the expectation interest, a good reasonfor using the expectation measure of damages as the norm was that itgenerally results in the same recovery as the reliance measure wouldand is easier to prove.7 1 I have already explained why the two mea-sures do not generally result in the same recovery. 72 I will now ex-plain why the expectation measure is also not generally easier toprove.

As even first year law students now learn, the very opposite is thecase: Reliance damages are always easier to prove than expectationdamages. Reliance damages consist of the costs the plaintiff incurredafter the contract was made and before the defendant breached. Ex-pectation damages consist of these costs, plus all the other costs theplaintiff incurred, plus the profit the plaintiff would have made if thedefendant had not breached. Thus, proving expectation damages isalways more difficult, because it always requires proving the reliancedamages and more.

It is for this reason that the most common use of the reliance mea-sure is to obtain a recovery when the plaintiff cannot prove the profitshe would have made if the defendant had not breached. 73 For exam-ple, in Security Stove & Manufacturing Co. v. American Railways Ex-press Co. ,74 the defendant contracted to deliver twenty-one packagesto Atlantic City, New Jersey, in time for the plaintiff to use their con-tents to construct an exhibit of its oil burning furnace at a conventionof the American Gas Association. The defendant failed to deliver oneof the packages that contained a crucial part until the convention wasover. The court awarded the plaintiff its reliance damages on theground that a plaintiff is entitled to them if he cannot prove his expec-tation damages. 75

69. Id. at 60.70. See supra section II.B.71. Fuller & Perdue, supra note 5, at 60-62.72. See supra sections III.A-III.B.73. FARNSWORTH, supra note 1, § 12.16 (making the same point).74. 51 S.W.2d 572 (Mo. Ct. App. 1932).75. Id. at 577.

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V. CONCLUSION

The expectation measure, and only it, meets the needs of the prin-cipal institutions in a modern market economy in which contracts areused, in four critical respects. It provides a remedy for every breach.It makes contracts enforceable as soon as they are made. It compen-sates the injured party for what he has lost, as the institution con-cerned values that loss. And it provides the right incentives fordecisions whether to breach. Neither of the other measures meetsthese institutions' needs in even one of these respects. These institu-tions would collapse if damages for breach of contract were limited toeither of the other measures. The three interests thesis is much tooflawed to be of use for comparing the merits of the three measures.

EXPECTATION DAMAGES

APPENDIX

Excerpts from L. L. Fuller & William R. Perdue, Jr., TheReliance Interest in Contract Damages: 176

(starred numbers indicate original pagination)

[53*] It is convenient to distinguish three principal purposes which

may be pursued in awarding contract damages. These purposes, andthe situations in which they become appropriate, may be stated brieflyas follows:

First, the plaintiff has in reliance on the promise of the defendantconferred some value on the defendant. The defendant fails to per-form his promise. The court may force the defendant to disgorge thevalue [54*] he received from the plaintiff. The object here may betermed the prevention of gain by the defaulting promisor at the ex-pense of the promisee; more briefly, the prevention of unjust enrich-ment. The interest protected may be called the restitution interest.For our present purposes it is quite immaterial how the suit in such acase be classified, whether as contractual or quasi-contractual,whether as a suit to enforce the contract or as a suit based upon arescission of the contract. These questions relate to the superstruc-ture of the law, not to the basic policies with which we are concerned.

Secondly, the plaintiff has in reliance on the promise of the defen-dant changed his position. For example, the buyer under a contractfor the sale of land has incurred expense in the investigation of theseller's title, or has neglected the opportunity to enter other contracts.We may award damages to the plaintiff for the purpose of undoing theharm which his reliance on the defendant's promise has caused him.Our object is to put him in as good a position a he was in before thepromise was made. The interest protected in this case may be calledthe reliance interest.

Thirdly, without insisting on reliance by the promisee or enrich-ment of the promisor, we may seek to give the promisee the value ofthe expectancy which the promise created. We may in a suit for spe-cific performance actually compel the defendant to render the prom-ised performance to the plaintiff, or, in a suit for damages, we maymake the defendant pay the money value of this performance. Hereour object is to put the plaintiff in as good a position as he would haveoccupied had the defendant performed his promise. The interest pro-tected in this case we may call the expectation interest.

[56*] It is obvious that the three "interests" we have distinguisheddo not present equal claims to judicial intervention. It may be as-

76. 46 YALE L.J. 52, 53-62 (1936) (footnotes omitted). Reprinted with permissionfrom the Yale Law Journal.

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sumed that ordinary standards of justice would regard the need forjudicial intervention as decreasing in the order in which we havelisted the three interests. The "restitution interest," involving a com-bination of unjust impoverishment with unjust gain, presents thestrongest case for relief. If, following Aristotle, we regard the purposeof justice as the maintenance of an equilibrium of goods among mem-bers of society, the restitution interest presents twice as strong aclaim to judicial intervention as the reliance interest, since if A notonly causes B to lose one unit but appropriates that unit to himself,the resulting discrepancy between A and B is not one unit but two.

On the other hand, the promisee who has actually relied on thepromise, even though he may not thereby have enriched the promisor,certainly presents a more pressing case for relief than the promiseewho merely demands satisfaction for his disappointment in not get-ting what was promised him. In passing from compensation forchange of position to compensation for loss of expectancy we pass, touse Aristotle's terms again, from the realm of corrective justice to thatof distributive justice. The law no longer seeks merely to heal a dis-turbed status quo, but to bring into being a new situation. It ceases toact defensively or restoratively, and assumed a more active role. Withthe transition, the [57*] justification for legal relief loses its self-evi-dent quality. It is as a matter of fact no easy thing to explain why thenormal rule of contract recovery should be that which measures dam-ages by the value of the promised performance. Since this "normalrule" throws its shadow across our whole subject it will be necessary toexamine the possible reasons for its existence. It may be saidparenthetically that the discussion which follows, though directed pri-marily to the normal measure of recovery where damages are sought,also has relevance to the more general question, why should a promisewhich has not been relied on ever be enforced at all, whether by adecree of specific performance or by an award of damages?

WHY SHOULD THE LAW EVER PROTECT THE EXPECTATION INTEREST?

Perhaps the most obvious answer to this question is one which wemay label "psychological."... Whether or not he has actually changedhis position because of the promise, the promisee has formed an atti-tude of expectancy such that a breach of the promise causes him to feelthat he has been "deprived" of something which was "his." Since thissentiment is a relatively uniform one, the law has no occasion to goback of it. It accepts it as a datum and builds its rule about it.

The difficulty with this explanation is that the law does in fact goback of the sense of injury which the breach of a promise engen-ders. [58*] No legal system attempts to invest with juristic sanction allpromises. Some rule or combination of rules effects a sifting out forenforcement of those promises deemed important enough to society to

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justify the law's concern with them.... Therefore, though it may beassumed that the impulse to assuage disappointment is one shared bythose make and influence the law, this impulse can hardly be re-garded as the key which solves the whole problem of the protectionaccorded by the law to the expectation interest.

A second possible explanation for the rule protecting the expec-tancy may be found the much-discussed "will theory" of contract law.This theory views the contracting parties as exercising, so to speak, alegislative power, so that the legal enforcement of a contract becomesmerely an implementing by the state of a kind of private law alreadyestablished by the parties. ...

... This attitude finds a natural application to promises to pay adefinite sum of money. But certainly as to most [59*] types of con-tracts it is vain to expect from the will theory a ready-made solutionfor the problem of damages.

A third and more promising solution of our difficulty lies in an eco-nomic or institutional approach .... In a society in which credit hasbecome a significant and pervasive institution, it is inevitable that theexpectancy created by an enforceable promise should be regarded as akind of property, and breach of the promise as an injury to thatproperty. ...

The most obvious objection which can be made to the economic orinstitutional explanation is that it involves a petitio principii. A prom-ise has present value, why? Because the law enforces it. "The expec-tancy,"[60*] regarded as a present value, is not the cause of legalintervention but the consequence of it. This objection may be rein-forced by a reference to legal history. Promises were enforced longbefore there was anything corresponding to a general system of"credit," and recovery was from the beginning measured by the valueof the promised performance, the "agreed price." It may therefore beargued that the "credit system," when it finally emerged was itself inlarge part built on the foundations of juristic development which pre-ceded it.

The view just suggested asserts the primacy of law over economics;it sees law not as the creature but as the creator of social institutions.The shift of emphasis thus implied suggests the possibility of a fourthexplanation for the law's protection of the unrelied-on expectancy,which we may calljuristic. This explanation would seek a justificationfor the normal rule of recovery in some policy consciously pursued bycourts and other lawmakers ....

What reasons can be advanced? In the first place, even if our inter-est were confined to protecting promisees against an out-of-pocketloss, it would still be possible to justify the rule granting the value ofthe expectancy, both as a cure for, and as a prophylaxis against, lossesof this sort.

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It is a cure for these losses in the sense that it offers the measure ofrecovery most likely to reimburse the plaintiff for the (often very nu-merous and very difficult to prove) individual acts and forbearanceswhich make up his total reliance on the contract. If we take into ac-count "gains prevented" by reliance, that is, losses involved in forego-ing the opportunity to enter other contracts, the notion that the ruleprotecting the expectancy is adopted as the most effective means ofcompensating for detrimental reliance seems not at all far-fetched.Physicians with an extensive practice often charge their patients thefull office call fee for broken appointments. Such a charge looks on theface of things like a claim to the promised fee; it seems to be based onthe "expectation interest." Yet the physician making the charge willquite justifiably regard it as compensation for the loss of the opportu-nity to gain a similar fee from a different patient. This foregoing ofother opportunities is involved to some extent in entering most con-tracts, and the impossibility of subjecting this type of reliance to anykind of measurement may justify a categorical rule granting the valueof the expectancy as the most effective way of compensating for suchlosses. [61*]

In seeking justification for the rule granting the value of the expec-tancy there is no need, however, to restrict ourselves by the assump-tion, hitherto made, that the rule can only be intended to cure orprevent the losses caused by reliance. A justification can be developedfrom a less negative point of view. It may be said that there is notonly a policy in favor of preventing and undoing the harms resultingfrom reliance, but also a policy in favor of promoting and facilitatingreliance on business agreements. As in the case of the stoplight ordi-nance we are interested not only in preventing collisions but in speed-ing traffic. Agreements can accomplish little, either for their makersor for society, unless they are made the basis for action. When busi-ness agreements are not only made but are also acted on, the divisionof labor is facilitated, goods find their way to the places where they aremost needed, and economic activity is generally stimulated. These ad-vantages would be threatened[62*] by any rule which limited legalprotection to the reliance interest. Such a rule would in practice tendto discourage reliance. The difficulties in proving reliance and sub-jecting it to pecuniary measurement are such that the business manknowing, or sensing, that these obstacles stood in the way of judicialrelief would hesitate to rely on a promise in any case where the legalsanction was of significance to him. To encourage reliance we musttherefore dispense with its proof. For this reason it has been foundwise to make recovery on a promise independent of reliance, both in

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the sense that in some cases the promise is enforced though not reliedon (as in the bilateral business agreement) and in the sense that re-covery is not limited to the detriment incurred in reliance.